International shares reporting season update

Key points

• Faces headwinds from a stronger US Dollar (reducing international earnings).
  However, it still maintained guidance for double-digit revenue growth in FY22 across its key segments of Digital Media and Digital Experience. Continues to grow its reach across creative applications with offerings under the Creative Cloud umbrella seeing use cases e.g. new media such as 3D.
• Continues to invest in organic and acquired research and development to maintain attractiveness for existing and new clients.
• Result achieved despite ceasing all sales into Russia and Belarus with an expected hit to revenue of US$75m in FY22 (also including expected decline in Ukraine demand).

• Results show continued execution of the broader Adobe platform business with partners (businesses that piggyback off Adobe solutions and help spread their usage) continues to grow. Russia-Ukraine conflict had a relatively minor impact on overall business performance.

Key points

• Inflationary pressures continued to impact the retail business, including higher shipping costs (partly due to lockdowns in China and higher energy prices).
• Another contributor to higher expenses was higher wages and weaker productivity with Amazon management citing a situation of being overstaffed (relative to customer demand).
• Amazon Web Services (AWS), the cloud computing offering of Amazon, saw net sales of US$18.4b in the March quarter, reflecting growth of 37% for the year as the company continues to be a market leader.
• The net loss in this quarter was US$3.8b largely driven by a pre-tax valuation loss of US$7.6b for its holding in automotive business Rivian (partly reversing a US$12b gain in the previous quarter).
• The previously announced 20-for-1 stock split occurred in early June, potentially improving liquidity for retail shareholders (although this impulse in the US is weakening between lower fiscal stimulus and higher interest rates).

• AWS continues to be the core part of the Amazon value proposition with strong sales and stronger profitability growth a hallmark, particularly notable given its already large size relative to other providers.
• Inflation remains a risk given the scale of the retail business for Amazon, in particular, the number of employees and capital spending requirements.

Key points

• Sales and earnings both came in ahead of consensus for the March quarter.
• iPhone sales remain a key driver with revenues of US$50.6b following release of the new generation of iPhone 13, up 5.5% on Mar-21.
• Apple Services also continues to play an important role with revenue growth of 17% to US$19.8b in sales.
• The accessories category (e.g. the Apple Watch) saw revenue rise 12% to US$8.8b, the only segment missing consensus forecasts, attributed to weaker demand in non-Watch/AirPods accessories.
• The subscription base also continued to grow with 825m paying subscribers, up 40m from the 785m reported in the December quarter.
• Supply chain issues (e.g. China lockdowns) remain a headwind with an estimated drag of US$4b-8b on sales in the third quarter. Cuts to sales in Russia would also impact revenue more sharply in the June quarter (only one month was affected for March).

• Demand remains robust across Apple’s product suite most notably its flagship iPhone.
• Broadening its services base and the range in service offerings is also making the product set more integral to consumers, which should ensure a degree of pricing power is maintained.
• Building out its ads business could in time be another lever for profitability as we have seen with the Amazon experience (US$31b in revenue for 2021).
• Supply chain issues remain a point of concern that could drive weaker profitability (beyond consensus forecasts).

Key points

• Overall result was strong with underlying EPS surprising on the upside.
• One point of concern was the Nutrition business, particularly infant formula products. This followed the product recall of these products and the shutdown of a Michigan factory, which was linked to bacterial infections in infant formula that saw two babies die. The company is subject to an ongoing FDA investigation but has maintained that the infections were not related to contamination at the factory and has since resumed production.
• COVID-19 test sales continue to be a strong revenue driver with the Diagnostics division growing sales by 35% on pcp (12% excluding COVID-19 test sales). The Medical Devices segment also saw double-digit growth of 11.5% in the quarter with some surgery-reliant segments expected to normalise as COVID-19 cases decline and more operations can occur.
• Maintained adjusted EPS guidance of US$4.70 for FY22 with total sales (excluding COVID-19 tests) expected to grow by approximately 5-9% for the year, a slight downgrade due to the impact of the product recall in Nutrition.

• Sustainability of COVID-19 test volumes remains a question mark on the business. Market consensus continues to include a decline in top-line revenues as testing volumes are assumed to decline.
• The infant formula recall does not impair the value of the overall business in our view. Paediatric Nutrition sales of US$2.2b in 2021 represented 13.2% of overall revenues. This is meaningful, but we do not expect this part of the business will be permanently impaired and the resumption of factory production (in line with FDA requirements) should allow for recovery in sales over the remainder of 2022.

Key points

• Missed expectations for both earnings and revenue (only US$0.1b miss) in the March quarter.
• YouTube advertising sales of US$6.9b (consensus: US$7.5b) were a notable driver of the result. This followed the cessation of business in Russia while brand advertisers in Europe also reined in spending after the Russian invasion began.
• Their “Other” business representing a collection of long-term plays also saw revenue come in below expectations at US$6.8b (consensus: US$7.3b).

• Revenue growth and profitability have been challenged by the Russian invasion with Russia accounting for 1% of Google revenues in 2021. This is a figure that will need to be impaired following Alphabet’s decision to not continue selling into Russia in line with other multinational businesses.
• Google Cloud is also providing an important source of revenue growth (+44% year-on-year) and continues to narrow operating losses as it gains greater operating leverage.
• The combination of these factors has seen earnings estimates soften for 2022 (current consensus expects no growth before recovery in 2023).
• The core value of Google, specifically its search franchise, remains intact with ventures, such as Google Cloud, offering additional optionality and value.

Key points

• Maintained its 2022 guidance for underlying EPS and sales of 8.2-10.2% and 7-8.5% respectively.
• Consumer Health continued to show signs of supply chain pressure due to commodity price inflation.
• Medical Devices saw a stronger-than-expected recovery in the March quarter supported by declining COVID-19 cases in the US.
• The COVID-19 vaccine saw US$500m in sales for the quarter but the company suspended guidance (US$3b in sales for 2022) due to a mix of a surplus of vaccine supply globally and hesitancy seen in developing markets.
• Foreign exchange (a stronger US Dollar) also remains a headwind with the CFO suggesting a hit of up to US$0.45 to underlying EPS for 2022.

• Remains positioned for a mix of organic and acquired earnings growth with recent new approvals across medical devices and pharmaceutical showing the R&D pipeline paying dividends.

Key points

• Outperformed consensus forecasts for both revenue and earnings finishing ahead of both by 0.6% and 1.4% respectively. This was the smallest revenue beat since 2018.
• Cloud revenue growth also saw a 46% increase over the year, slightly ahead of analyst forecasts for 45.3%.
• Guidance for Q4 revenue of US$52.4-53.2b saw the midpoint slightly below consensus of US$52.95b.
• In early June, Microsoft cut back its forecasts for Q4 due to a stronger US dollar, which has reduced the earnings of overseas operations (these account for half of Microsoft’s total revenue).

• Microsoft software partners continue to position the firm attractively as an ecosystem to carry on growing earnings in low double-digits over the next four years (according to current consensus estimates).
• Currency headwinds are difficult to anticipate and do not impair the overall attractiveness of the Microsoft business, which is trading at reasonable levels given its growth profile and the quality of its earnings.

Key points

• Continued strength in organic sales with growth of 7.6% in the March quarter. This was comprised by a mix of higher prices (contributing 5.2% to counter higher cost inflation), as well as stronger volumes (contributing 2.4%).
• Repositioning the portfolio of brands was another feature of the quarter with net divestitures decreasing sales by 1.3%.
• As with US-based firms, a strong currency (here the Swiss Franc) was a headwind, subtracting 0.8% from sales for the quarter.
• Consumer demand across both developed and emerging markets remains strong with growth of 6.7% and 8.8% respectively (the split in emerging markets was roughly equal between higher prices and underlying volume growth).
• Management guided to higher pricing to counteract strong inflation with the war in Ukraine adding to their expectations. To date they have not seen material elasticity in demand due to higher prices (i.e. consumers are still maintaining spending).

• Overall, portfolio remains well-positioned for mid-single digit revenue growth and slightly higher earnings growth thanks to pricing power.
• Valuation remains reasonable in our assessment for a strong compounder able to grow at a reasonably high level and return excess capital back to shareholders as dividends and buybacks.

Key points

• Revenue growth was boosted by stronger freight volumes, up 4% due to bulk and industrial commodities.
• The operating ratio (proportion of operating expenses relative to operating revenues) improved to 59.4% thanks to fewer negative weather events (relative to 2021), while higher fuel prices acted as a partial offset.
• Congestion on its rail lines impacted its ability to meet customer demand with labour shortages, also posing a headwind. This has led to further action by management to improve resource utilisation and increase crews and locomotives where appropriate to counteract a 6% year-on-year decline in locomotive productivity.

• National rail volumes have remained elevated although showing signs of slowing recently, which would reduce network congestion.
• 6% recovery in automobile volumes (flagged in the previous update) was also encouraging, driven by an increase in auto parts.
• Combination of high single digit earnings growth and dividends remains attractive. The more consolidated nature of US rail networks (relative to prior recessions) should also support earnings power even if US growth continues softening.

Key points

• Strong demand from data centre clients and disruption in manufacturing at Western Digital saw memory chip sales as a key driver of earnings (approximately half of the quarterly profit).
• Smartphone sales were down 13%, partly due to a later-than-usual release of its new flagship model, the Galaxy S22.
• Management also noted its order book over the next five years for chip contract manufacturing was eight times its 2021 revenue, with the company planning to wine more customers in fields outside mobile phones, such as high-performance computing and the automotive industry.
• A weaker Q2 for mobile phone and personal computer chip sales was flagged due to headwinds to consumers including higher inflation.

• The business continues to execute well in the face of ongoing supply chain disruptions.
• The different facets of the business allow it to diversify over the course of the cycle while it still retains its position as a major hardware manufacturer across smart phones, chips and other technology with its Harman acquisition allowing greater inroads into the automotive sector.

Key points

• As with other companies, Visa decided to suspend operations in Russia with the overall conflict expected to see a 4% hit to revenue.
• Unlike other businesses however it had offsetting factors such as a recovery in travel spending with other parts of Europe not seeing any material impact on cross-border travel.
• Cross-border volumes surged 38% in the quarter with total payment volumes climbing 17%.
• Wage pressures did contribute to rising operating costs, which rose 11% to US$2.4b with higher marketing spend being another driver.

• Secular trends remain intact with gradual transition from cash to electronic payments persisting even in more established markets, such as the US and Europe.
• Overall, prospects for continued earnings growth (double-digits over next four years per consensus) continue to appear reasonable with the company weathering the latest bout of equity market volatility better than other peers.
• Any flow-on impact from the Russia-Ukraine conflict appears to be limited, adding confidence to the near-term outlook.
• One potential headwind, notwithstanding secular trends towards digital payments, would be the broader macroeconomic environment and whether consumers may pull back discretionary spending in a higher interest rate environment. Management expects the business to continue to be resilient even if a growth slowdown eventuates.